Gas prices are displayed at a gas station on March 12, 2024 in Chicago, Illinois.
Scott Olson | Getty Images
From consumer and wholesale prices to the overall long-term outlook, inflation sent multiple reminders this week that it is not going away anytime soon.
Comprehensive data showed that pressures were increasing faster than expected, raising concerns that inflation may be more sustainable than policymakers expected.
The bad news started on Monday when a New York Fed poll showed that consumers' long-term expectations accelerated in February. Tuesday continued with news that consumer prices rose 3.2% from a year ago, then peaked Thursday with a release indicating that pressures on pipelines at the wholesale level are also increasing.
That will be a lot for the Federal Reserve to think about when it meets Tuesday for a two-day policy meeting where it will decide the current level of interest rates and provide an updated look at where it sees things heading in the longer term.
“If the data continues to flow like this, it will become increasingly difficult to justify a pre-emptive rate cut,” wrote Stephen Blitz, chief US economist at TS Lombard. Taken together, the numbers show that “the significant downturn has halted and appears to be reversing.”
The latest jolt to inflation came on Thursday when the Labor Department reported that the Producer Price Index, a forward-looking measure of pipeline inflation at the wholesale level, showed a 0.6% increase in February. That was double Dow Jones estimates and pushed the 12-month level 1.6% higher, the biggest move since September 2023.
Earlier in the week, the department's Bureau of Labor Statistics said the Consumer Price Index, a widely followed measure of the market costs of goods and services, rose 0.4% month-over-month and 3.2% from a year ago, the latter figure slightly higher than Climate prediction.
While rising energy prices contributed significantly to higher inflation figures, there was also evidence of broader pressures from items such as airfares, used vehicles and beef prices.
In fact, as the focus shifted to services inflation, goods prices jumped 1.2% in the PPI reading, the largest increase since August 2023.
“There are still signs in the PPI data that the decline in commodity price inflation is largely coming to an end,” Veronica Clark, an economist at Citigroup, wrote after the report was released.
All in all, stubbornly high prices appear to have negatively impacted consumer expectations and behavior. Although inflation is well below its peak in mid-2022, it has proven resilient despite the Fed's 11 rate hikes totaling 5.25 percentage points and its moves to reduce its bond holdings by about $1.4 trillion.
A Federal Reserve Bank of New York poll showed that inflation expectations for three and five years respectively rose to 2.7% and 2.9%. While such surveys are often particularly sensitive to gas prices, this study showed that energy expectations are relatively flat and reflect consumers' doubts that the Fed will meet its 2% target any time soon.
At the policy level, this could mean that the Fed may keep interest rates higher for longer than the market expects. Traders in the federal funds futures market earlier this year had scheduled as many as seven cuts totaling 1.75 percentage points. It has since been reduced to three cuts.
Coupled with surprisingly strong inflation data, consumers are showing signs of stopping their massive shopping spree over the past few years. Retail sales rose 0.6%, but that was less than estimated and came after a downwardly revised decline of 1.1% in January, according to figures seasonally adjusted but not for inflation.
Over the past year, sales increased 1.5%, or 1.7 percentage points below the headline inflation rate and 2.3 points below the core rate that excludes food and energy.
Investors will get a look at how Fed officials feel when the interest rate-setting Federal Open Market Committee meets next week. The Federal Open Market Committee will issue its interest rate decision — there's almost no chance of it changing in either direction — as well as its revised forecasts for long-term interest rates, GDP, inflation and unemployment.
The Fed is right to take a patient approach, said Blitz, the economist at TS Lombard, after officials said in recent weeks they needed more evidence from data before moving to cut interest rates.
“The Fed has time to watch and wait,” he said, adding that “the odds that the next step will be a rate hike are greater than zero.”
